IP: Is it safe to settle? Patent holders have reason to think twice

Abrand-name pharmaceutical company engaged in patent litigation with a generic competitor settles the dispute by paying the generic competitor a significant sum of money to drop the litigation and stay out of the market until sometime before the brand-name’s patents expire. Because the patent holder is the party paying, rather than the other way around, this type of agreement is called a “reverse-payment.” It’s an intellectual property strategy we’re seeing more and more often within the pharmaceutical industry — at least, we were, until a recent Supreme Court decision.

Brand-name pharmaceutical companies realized that rather than risk having their patents found invalid or not infringed, settling with the generic competitors would be a win-win for both parties. That is, brand-names could continue profiting from their drug sales while generic competitors could receive a settlement payment in lieu of their own sales. Nice and easy. The problem, however, is that generic options tend to reduce drug prices, which means that these “reverse-payment” agreements tend to discourage competition and increase overall drug costs.

The Federal Trade Commission (FTC) recently challenged one of these agreements in FTC v. Actavis. In its FDA filing, Actavis asserted a right to produce a generic version of AndroGel, a testosterone replacement therapy. The brand-name manufacturer sued Actavis and the parties eventually settled, with Actavis to receive a significant sum of money. The FTC challenged the settlement as violating antitrust laws, but the court of appeals rejected the claim, noting the brand-name’s patent gave it the right to exclude competitors—even by paying them.

In a 5-3 opinion, the Supreme Court reversed the decision and ruled the FTC could in fact challenge these agreements. The Court held that the government and private parties may seek to prove that these payments violate antitrust laws. It did not, however, side with either the FTC or the drug companies on the legality of the “reverse-payment” deals themselves.

The impact this decision will have on reverse-payment agreements in the pharmaceutical industry alone is obvious. The tentacles of this ruling, however, may reach even further, to other antitrust issues involving intellectual property, such as patent assertion entities (i.e., patent trolls) and patent license agreements.

While there are many implications of the FTC v. Actavis decision, this article focuses on four key takeaways.

Effect of the Court’s decision on Hatch-Waxman challenges: The Court stated that reverse-payment agreements should be evaluated under a “rule of reason” test. The test is very fact specific, and addresses four main areas. If you are litigating a Hatch-Waxman case, the probability of a ruling that a reverse-payment agreement brings about anticompetitive effects now depends on the following:

The size of the payment

Its scale in relation to the payor’s anticipated future litigation costs

Its independence from other services for which it might represent payment

The lack of any other convincing justification

Effect on patent assertion entities (PAEs): Despite the 5-3 vote, the justices seemed to agree that antitrust concerns can arise when patent holders make agreements between one another, such as by pooling their patents. For PAEs engaging in this type of practice, the Actavis decision will likely mean that their actions will be more closely analyzed moving forward. For example, if two or more patent holders agree to pool their patents, such pooling can, and likely will, raise antitrust concerns even if the holders offer licenses within the scope of their patents. This decision, therefore, will likely increase the spotlight on PAEs.

Impact on cases outside the pharmaceutical industry: This decision may have implications on areas of intellectual property law outside settlement agreements between brand name and generic pharmaceutical companies. After illustrating how patent settlements have, in the past, raised antitrust concerns, the Actavis majority pointed to overly restrictive licensing and cross-licensing agreements that raised the same concerns. The dissent then added patent pools to the list. The Supreme Court’s decision, therefore, will likely bring greater scrutiny on any patent licensing or settlement agreement that appears to be anticompetitive.

Effect on settled cases: Prior to the Actavis decision, some antitrust suits challenging reverse-payments were decided in favor of the settling parties. Now that the Supreme Court has spoken, it is possible for parties affected by those decisions, but who did not participate in the litigation and are not barred by issue or claim preclusion, to re-challenge those settlements. If so, choice of forum may become key to obtaining a favorable ruling. This would also allow a body of case law to develop for the rule of reason analysis that might not otherwise exist due to the heightened scrutiny on reverse-payments going forward, and the predictable reduction of such settlements.

Since FTC v. Actavis was decided, two district courts have had an opportunity to apply the Supreme Court’s decision: In re Lipitor Antitrust Litigation and In re Nexium Antitrust Litigation. Both courts found that Actavis does not require a patentee to pay large sums of money to a generic manufacturer as the only means to trigger antitrust concerns. Presuming later courts follow suit, the Actavis decision will likely have implications beyond the typical reverse-payment settlement.

The concept of reverse-payments is fascinating. Generic competitors were being paid to stay out of the market, and with court approval. The Supreme Court’s decision that such arrangements are subject to antitrust scrutiny will impact the strategy of reverse-payments in Hatch-Waxman litigation going forward, and will likely have several other implications. It is also possible for the Actavis decision to reduce pharmaceutical competition. With reverse-payment settlements under such heavy scrutiny, generic manufacturers may think twice before entering the market and challenging brand-names’ patents. This, of course, would have the opposite effect on consumers than what the Supreme Court intended.

Contributing Author

Robert A. Surrette

Robert A. Surrette is the President and a shareholder at McAndrews, Held & Malloy, Ltd. He focuses his practice on the resolution of intellectual property...